A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

INDUSTRY OVERVIEW

1.2.2

Buyouts

Buyout is a private equity strategy which consists in the purchase of controlling interest in one corporation by another corporation in order to take over assets and/or operations, often with the idea of improving and selling them later. Buyout focuses on mature businesses with stable cash flows. A leveraged buyout (LBO) refers to a buyout when the acquisition is leveraged through debt financing, whereas a management buyout (MBO) refers to a buyout when the acquisition is made by the company’s managers or employees. Most private equity capital is invested in the buyout sector worldwide. The GPs of the larg- est buyout funds are currently located in the United States and the United Kingdom. They are famous names such as Blackstone Group, Hellman & Friedman, KKR or Candover Partners. Until 2007, the private equity industry growth was largely driven by the buyout sector, with mega funds of increasingly large size closing consistently in excess of their original targets as a result of institutional investors’ confidence in the ability of these managers to create value. However, the large buyout market was strongly hit by the economic crisis and its plight received considerable attention. Indeed, the credit crisis has left many banks short of liquidity and unwilling to issue new leveraged loans, triggering a sharp slowdown in LBO activity. Mezzanine financing can be debt (usually unsecured or subordinated debt) or equity (usu- ally preferred equity) or a mixture of debt and equity and targets more mature companies, which need capital to grow, expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business. This instrument allows investors to make indirect participation in a private company, by using warrants, subordinated debt, options or convertible bonds. It gives the lender the right to convert a loan into ownership in the company, if the loan is not paid back on time and in full. Since the private equity investor grants a loan to the borrowing company very quickly with little due diligence or required collateral, the lender can charge a high rate of interest, which is often in the 20-30% range. Mezzanine financing is advantageous, because it is treated like equity on a company’s balance sheet, which may make it easier to obtain standard bank financing. Mezzanine financing

1.2

1.2.3

The withdrawal of banks and an increase in private and public companies looking for more flexible sources of credit is opening up opportunities for mezzanine finance funds.

1.2.4

Distressed debt

Distressed debt refers to the bonds of a company that is either in or approaching bankrupt- cy. Some private equity funds specialise in purchasing such debt at significant discounts with the expectation of exerting influence on the restructuring of the company and then selling the debt once the company has meaningfully recovered.

A thorough understanding of PE | page 23